Housing Recovery? It never existed. Since the start of the publication of the Smaulgld blog back in April this year we questioned whether there was a housing recovery. Yesterday we learned from the National Association of Realtors that pending home sales in the month of September were down 5.6%. Pending home sales in September 2013 were lower than September 2012.

September’s pending home sales were the lowest in 29 months. It was the fourth straight month of lower pending home sales.

Blaming September’s lower pending home sales on the government shutdown in September is like blaming poor December Christmas holiday sales on inclement weather in January. The real estate recovery fantasy narrative goes like this- “Back in September while people were gainfully employed and flush with cash, they became petrified that the government might shut down the Lincoln Memorial, so they immediately curtailed their home buying plans. Now that that the monuments have reopened, we expect home buyers to return in full force in October.”

The reality is, as we have said all along, there never was a housing recovery. There was only a real estate market with higher prices for a while driven, not by an increase in first time home buyers, but rather from institutional investors taking advantage of historically low interest rates engendered by the Federal Reserve’s quantitative easing (QE) multi trillion dollar money printing scheme.

Once the Fed started talking about “tapering” QE earlier this year, interest rates rose causing an exodus of many institutional investors from the housing market. These investors are now focused on renting the homes they bought recently, a large portion of which are vacant. This highlighted that the housing recovery was not an organic event, driven by an improving economy but rather a housing price bubblet driven solely by the Fed’s artificially low interest rates that the average person was not in a position to take advantage.

In April we recognized that home prices had risen but questioned whether there was sufficient demand to keep them rising as the underlying economy was weak and higher interest rates were coming:

“Housing is back”! Spencer Rascoff, CEO of Zillow recently declared. It appears to be, if you judge the market based on home prices. Where, however, is demand going to come from to keep the real estate market going?

Demand for products and services should come from a healthy economy that has increasing employment, rising wages, savings and investment. None of these are present in the current economy. What is present and helping to fuel housing demand and support the real estate market are low rates artificially generated by the Federal Reserve through its “tool” quantitative easing.

These low interest rates won’t last indefinitely either because the Fed will pull back its quantitative easing experiment (unlikely), inflation takes off forcing the Fed to raise rates, or the market eventually demands higher rates in return for the risk of investing in a sovereign that has no ability to pay without resorting to printing more money. A modest increase in interest rates would dramatically increase the United States’ borrowing costs and stop the real estate market and the economy in its tracks.

While the housing recovery appeared to be in full swing, we predicted that more homes would come on to the market alleviating the “inventory shortage” and that a poor a economy and rising interest rates would curb demand for homes.

The current housing bubblet is not driven by any of the above factors. It is driven by one factor – the Federal Reserve’s quantitative easing (QE) policy that involves printing trillions of dollars to purchase MBS’s and U.S. treasuries in an effort to keep interest rates low and to spur another housing bubble. As we have noted on this blog, housing prices have not headed higher in the past year because the economy was improving but solely because the Fed manipulated interest rates to artificial and historic lows.

In July we noted a half dozen reasons not to like rising home prices, including making homes unaffordable:

Ask a first time homebuyer, a part time worker or anyone looking for a home if higher home prices are a good thing. Higher home prices shut would be homebuyers out of the market, lower the home ownership rate and raise the cost of shelter.

We also disagreed that low inventory was going to drive home prices higher:

A housing inventory shortage is not the same as a housing shortage. We have a temporary inventory shortage not a permanent housing shortage. Inventory will become available just as demand drops due to a weak economy and rising interest rates. When that happens, this housing bubblet will burst.

The current real estate recovery is characterized by higher home prices driven by low inventory and high demand relative to the existing inventory. The demand is driven by Fed induced low interest rates that has invited speculators to the real estate market.

With investors fleeing the real estate market because of higher interest rates, with fewer people working and those that are working are earning and saving less, who is going to be able to buy houses in sufficient volumes to keep the real estate “recovery” going? It doesn’t matter how low interest rates are if people don’t have the incomes, savings or credit to buy homes. Rising interest rates can only make a bad situation worse.

Just because a house of cards is still standing doesn’t mean it’s not a house of cards.

In August we scoffed at the persistent statements that higher interest rates would not derail the housing recovery:

“Consumers have taken the interest rate rise in stride. Expectations for continued improvement in housing persist, and sentiment toward the current buying and selling environment is back on track from its dip last month” Doug Duncan, senior vice president and chief economist at Fannie Mae.

Interest rates, like deficits, matter. No amount of wishful thinking by industry experts can repeal economic principles. In the words of Federal Reserve Chairman Ben Bernanke “The economy is weak” as is the job market.

Today’s the US Census Bureau announced that new home sales plunged 13%, a clear sign that interest rates are impacting home buying behavior. Higher rates add to the cost of buying a home.

Without improvement in the overall economy and labor market (including labor participation and wage growth), housing can not truly recover. The current real estate market “recovery” has been solely driven by Federal Reserve’s quantitative easing (QE) program that has artificially manipulated interest rates lower. The mere suggestion that QE may come to end end via all the taper talk done by Fed Chairman and his fellow board governors has driven interest rates up 80% since mid May.

In August we also questioned how much longer the housing recovery could last in the face of a stagnant economy:

We wrote here over the past several months that the air would soon start coming out of the housing bubblet. We noted that the temporary inventory supply/demand imbalance would soon reverse. We noted high levels of student loan debt and a poor jobs market producing mostly part time jobs would hamper any further housing sales and price appreciation.

We noted interest rates would rise because of the Fed’s taper talk (not because the economy was improving) and put further pressure on the real estate market. We noted Bernanke’s admission that the economy was weak and would tank without low interest rates.

We were assured through endless Keynesian self congratulating that quantitative easing (QE) spawned a recovery that was underway and the worst was over. We thought such celebrations premature. We were told interest rate increases didn’t matter;the housing recovery would continue apace. We disagreed.

We also learned that institutional buyers were responsible for the bulk of recent home purchases:

Last week we learned what we suspected all along – housing demand was not widespread and did not include individual home buyers in significant numbers. Goldman Sachs reported that more than 50% of the real estate market was being driven by cash buyers and speculators attracted by super low interest rates driven by QE.

We concluded:

The recent run up in the prices of real estate have not been matched by any corresponding productivity, employment or wage growth – not even close.

In September we re-examined the real estate supply/demand dynamic and concluded that as prices of real estate rose, the nearly 25% of underwater U.S. homeowners who couldn’t sell because prices were lower than what they paid for their homes, would, once their home prices rose to a level higher than what they paid, bring their homes to the market thus adding inventory which would depress prices and keep prices from rising further.

We viewed this contention as pure fantasy and described the unlikely circumstance of millennials driving the housing recovery like this:

…household formation will increase when, during that glorious moment we will see millennials in their million hordes from California to the Eastern shores emerging from their parents’ basements with full time jobs, reduced student loan debt, sterling credit and an interest in and ability to buy homes.

Millennials may more likely end up in one of American Homes 4 Rent rental homes which were recently 45% vacant than in their own homes or remain in their familial subterranean dwellings for many years. Or perhaps they will end up in any of the tens of thousands of Blackstone, Colony Capital, or Waypoint rental homes.
Until we have lower home prices, lower interest rates, lower student debt loads and higher full time employment rates among millennials you can count them out as a factor in the housing recovery.

the core premise of tracking the housing recovery as if it were a pre-ordained event driven by an organically improving economy, rather than a dead cat bounce fueled by the Fed’s zero interest policy and QE.

We noted:

Since abandoning its housing recovery watch, Trulia has released a study showing that in many cities, home prices are not affordable by even half of the potential middle class purchasers.

We concluded:

The over all economy was weak and that job and wage growth since the recession ended in 2009 were poor and with a population barely scrapping by, rising home prices could not be sustained. Home prices can’t rise if there are not enough people who can afford the higher prices.

So now, rather than let interest rates rise and allow the economy to restructure, we leave the housing market and the economy in the hands of newly nominated Fed Chair, Janet Yellen and her Precious Dollar Printing Press with which she will try and use to reflate the housing market with endless QE.

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The answer you look for is in HARP 3.0. The banksters will sell this as a benefit that we have a moral obligation to make available to the poor homeowners whose loans aren’t owned by Fannie and Freddie – we have a moral duty to help these people.

The fact is that the motivation for the banksters is to get those loans off their books where they can’t hurt them before home prices go back down to 1998 levels where they should be. The FED’s arms are trembling. They can’t hold the roof up forever; subterranean interest rates, hedge funds funded circuitously by the FED sweeping inventory off the market; they need the coup-de-gras now – HARP 3.0.

Once you see the transfer of these loans from the banksters books to the FED via Fannie and Freddie – watch out below. This is the end-game.

Here’s some of the setup that’s out there:

“The White House has made frequent reference to HARP 3 lately, calling the refinance program “A Better Bargain For The U.S. Homeowner”. Plus, in Congress, there’s an active bill in committee known the “The Responsible Homeowners Act of 2013″. This bill could be the HARP 3 blueprint once it’s passed as law.

“By any name, HARP 3 would expand the program’s scope. Similar to how HARP 2.0 added unlimited LTV clauses to render more U.S. households refinance-eligible, HARP 3′s changes are expected to do the same.

“Among the discussed changes for HARP 3 :

Allow “Re-HARP”, the refinance of an existing HARP mortgage
Allow non-Fannie Mae and Freddie Mac loans to get refinanced
Allow larger loan sizes in high-cost areas
Allow loans from after May 31, 2009″

And here’s the kicker:

“It’s not known whether HARP 3 will pass today, this week, this month, or even this year. However, it should be noted that the Federal Home Finance Agency does not require congressional approval in order to expand HARP.

If the agency wants to make changes to HARP, it can.”

Did you catch that? No congressional approval required. The writing is on the wall.

My wife and I purchased our first home in summer of 2011 in Los Angeles… We were worrying ourselves sick over the decision.. and the looming debt ceiling debacle wasn’t making us feel better upon closing. Now nearly 3 years later… after refinancing to a sub-4% interest rate.. each year doing upgrades to the home at a steady pace. First new pool equipment, then new HVAC system, kitchen appliances ect… It’s feeling like a home we are proud of and plan to live in for another 10 years.

Tell me this.. even if we decide to move and home prices fall below our 2011 price point… Given we have more than $100K in equity based off current appraisal… Or 1/4 the home in equity. With a 30 year fixed mortgage and payment rate well below what the home would rent out for. Why would we sell for a loss?

The fact that we could cover our mortgage and taxes by renting it out our 4 bed/2bath pool home for $2300.. I don’t see much downside risk from our entry point.

Sure if home prices dropped to 1998 levels plus inflation…we’d end up losing some equity.. But even then.. rents would have to fall through the floor in Los Angeles.. which has never happened.

Even if your home loses some value as rates rise, you still have locked in a monthly cost of shelter. If you can meet the payments and they are lower than renting somewhere else or a mortgage somewhere else you are ahead.